The Taxman’s at the Door

Tax is about to hit you like a bare fisted punch in the eye. You will be stripped of all your income, assets and savings as government drowns in deficits and debt. Is this the way it will turn out? Not likely. Certainly, government is drowning in deficits and debt but the taxation will arrive wrapped in the silky touch of the best propaganda machinery ever devised by masterful spin doctors. Your unprotected wealth, income and savings will more likely be dragged naked over a coral reef to die a slow death by a million tiny cuts. Then, when you look upon the dry corpse of your once liquid wealth consider this; all stimulations must be paid for in tax!

Here is the need. Would you dare to extrapolate this chart into the future?





How much taxation will it take to turn this chart down?

The tax will arrive in direct taxes for those who cannot revolt. To the others it will arrive in the form of indirect taxes disguised as anything but tax.

The official Corporate and Individual tax data to the end of 2007 look like this.





A bursting tax bubble has thrashed 50% off the previous $400billion corporate income tax take. Who talks their book when they say we have a recovery under way (see also charts further down)? Don’t you just love a bubble economy and the 1, 2, 3, 4 tax spikes? This is the business of maximizing tax income for government. Now visualize in your mind the spike that will be required to replace the direct and indirect tax collections from the 2003-2007 bubble episode.





FED data ends on 01/01/2008 and Personal Income Tax Receipts were still peaking. Growing unemployment is going to play havoc with this number.





Again the 1, 2, 3, 4 tax spikes. For a more up to date macro assessment complete with projections into a murky future we turn to data from the White House Office of Management and Budget.

The question may be asked; how often do we see significant declines in tax receipts? Rarely.





The events of 1929 are clearly relevant given that it was the only other previous incidence in more than a hundred years, apart from the year post WW2 which saw a significant drop in tax income. The data from the White House covers this period in detail.

The 1929 crash and its aftermath share another very important characteristic with the 2007 crash and its aftermath, a significant debt bubble. So how does the fiscal experiences of the depression compare with the modern experience of a debt bubble?





The tax collected by government saw a dramatic decline of 52.6% in the aftermath of the 1929 crash, while government spending was certainly in stimulation mode. Notably, taxation accelerated in spectacular fashion by 251% from $1,9bil in 1932 to $6.4bil in 1938. Growth during this period remained anaemic. In fact, the GDP growth fell dramatically from 1930 to 1933 and even by 1940 had not yet regained the GDP level of 1930 in spite of government stimulations in the 1930’s greater than anything implemented fiscally since 2007. Monetary policy was the dominant choice since 2007 but I have written often on monetary policy, here the focus is on fiscal policy. Observe that a weak economy is no protection against increased taxation.





The modern debt bubble has been under construction from 1980 until it popped in 2007. The chart hereunder picks up the story in 1990.





So much for counter cyclical fiscal behavior when tax receipts fell short of government spending in each of the boom years of 2003 to 2007. Tax collections though down, still held up in 2008 but took a 17.8% tumble into 2009. Again we note the discrepancy between tax collection and all the talk of recovery together with the exceptional performance of stock exchanges. The 2009 estimates have been presented on the 25th of August 2009 and should be close to the expected actual number. Expectations of a rise in tax collections in 2010 may be premature. The experience in 1929 where tax receipts not only dropped by more than 50% but also did not recover to the 1930 level until six years later in 1936 may indicate potential for a less favorable outcome than the current expectation and estimates.

The subset of Income Tax data yields further interesting data.

The official estimates of Income Tax collections are optimistic, particularly regarding individual taxes which are expected to exceed the 2007/08 levels by 2012. No tax recipes are expected to fall below 2009 levels and income tax collections will start rising as early as 2010 according to current estimates. I expect the tendency of downward revisions in actual tax receipts so prevalent in the Mid-Session Review of the Budget released in August 2009, to be with us for at least thru 2010.





Be sure to note the dramatic shift towards relying on personal income taxes in the modern USA budget. What will be the origin of the tax growth when the best case scenario is a “jobless” recovery and unemployment has yet to level out? Also, for a better perspective on a trillion dollar stimulation consider carefully how it equates to the total per annum Income Tax collected from individuals as averaged between 2005 and 2009. It is of particular interest to see that estimates of Corporate Income Taxes are for a fast recovery to 2007 levels and then to remain static until 2019. I find this projection a combination of opportunism and pessimism, even contrived when one observe the relentless growth projected for Individual Income Taxes against the static projection for Corporate Income Taxes. When the politicians say “Read my lips - no increased taxes”. Don’t. Rather read the charts.

Now for a look at Income Taxes during the period 1934 to 1938.





The burden was shared equally between Individual and Corporate Income Taxes during this period of economic history. The real story remains the dramatic increase in tax collected in the shadow of fiscal deficits and stimulations. Taxes in both categories increased more than 3 fold over this period. It is no coincidence that the Emergency Banking Relief Act of 1933 was passed in March 1933 confiscating Gold holdings to boost the coffers of the state. The need was great and gold confiscation was a tax against “hoarding”, popular with all non gold owning voters.

Stimulation remorse will be of no help. What’s done is done. The tax bill is in the post. TAX is what pays back government debt, a bit of inflation just hides the method and hyperinflation pays nobody. Hyperinflation simply destroys the economy and the currency. Hyperinflation means a lot of pain but no net real gain for anybody, including government. Thus do not look upon hyperinflation as an escape route from the inevitable reality of taxation unless you are prepared to pay the ultimate economic price.

The USA has its international debt in US$’s, while most other countries’ international debt is denominated in a currency other than its own. Any depreciation of the US$ against other currencies will depreciate the international debt of the USA but at a huge cost to imported inflation. It is taxation from behind that most precious and coveted international comparative advantage, the reserve and trade currency of the world. Having the reserve currency of the world allows one the use of money creation to sneak taxation across international borders, yet it is but one of many advantages. Only the most desperate politician would cash in this chip for a short term stealth tax gain. When they do, they may prompt the Chinese and all other funding nations to ask the question; “whose tax base is it anyway?”

Stimulations from central government in whatever form they may take are “fly-now-pay-later” schemes. Japan tried the stimulation-and-recovery trick recently and it failed. In 2009 everybody is pinning their hopes on a global stimulation-and-recovery trick to work. Children marvel at magic tricks but they do not actually believe in them. Intelligent adults seem to have bet their entire economic futures and their children’s economic fortunes on the trick of stimulation and recovery. A spontaneous economic recovery may rescue the global economy. In the ensuing boom Government can collect the required tax shortfalls without a taxpayer backlash. That is the wistful thinking. Cause and effect says it is more likely that the excessive abuse of debt may force a realignment of economic structural distortions. No recovery but, as with the housing bubble and like a bad hangover, the government debt will remain after the stimulation bubbly has been consumed.

The bullish thesis is entirely reliant upon the “stimulation-and-recovery” trick. The fear that shows the white of their eyes at any talk about withdrawing “stimulation” is sufficient to expose the anchor of the bullish thesis. The bears fear “stimulation” equally but not for it’s so called potential to heal the economy, rather for its potential to cause bear rallies. Thus the bulls love stimulations for it allows speculative trading with the support and blessing of government while slaughtering the bears. It may be a tragic drama or an exiting adrenalin rush depending on your favourite candidate but in the bigger picture it is the cost of the game and who will foot the bill that counts.

Government will kick the tax can down the road until it runs out of credit like every reckless borrower eventually must. The alternative is debt revulsion for public debt but that is a responsible outcome where the opportunism of cashing in on stimulations is more likely to draw the crowds. Again, Japan has set the example running up public debt four fold since 1990 and reaped only a 20 year deflationary slump in return.





Consider the harm to the Japanese taxpaying generation who will have to pay for that gratuitous spending frenzy.

Look upon the projected US Government Spending from 2010 to 2019 (hereunder) and the very first chart in this essay of US Total Public Debt, then contemplate who will pay, when the taxman comes knocking…





Sarel Oberholster
BCom (Cum Laude), CAIB (SA)
28 September 2009


© Sarel Oberholster



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